Oct. 2 (Bloomberg) -- Japanese Prime Minister Shinzo Abe’s
reflation campaign shifted to structural domestic reforms after
he unveiled a stimulus package offering a short-term cushion for
the first sales-tax rise since 1997.

Abe’s administration is honing legislation for its “growth
strategy” for the year’s final parliamentary session, an
initiative companies will scrutinize for fresh reasons to invest
in a domestic market burdened by a shrinking and aging
population. For now, they get a slew of tax breaks unveiled with
yesterday’s 5 trillion yen ($51 billion) program.

Getting businesses to start distributing their rising
profits and near-record cash through higher wages and new
projects at home will be key to sustaining a rebound in the
world’s third-largest economy. Without pay rises, households
will be hit by both higher taxes and living costs -- as energy
bills climb after the yen slid 21 percent the past year.

“What is needed is for the government to provide a long-term vision -- 10 years from now for example,” said Nobuyasu
Atago, a senior official at the Japan Center for Economic
Research in Tokyo who has worked at the central bank. “Unless
the potential growth rate is raised, there is no guarantee that
companies will really raise wages and boost capital investment
just because of tax incentives.”

Olympic Spending

The Topix index slid for a fourth day, losing 1.5 percent
today in Tokyo, as investors weighed the sales-tax increase and
stimulus plan and the U.S. government shutdown. The yen gained
0.4 percent against the dollar to 97.60 per dollar as of 3:51
p.m.

The package that Abe said yesterday would be prepared for
December will include measures to boost capital investment by
smaller companies; spending for the 2020 Olympics; payments to
low-income earners; and tax incentives for home purchases.

As well as 1 trillion yen in annual tax cuts, including 730
billion yen in investment tax reductions, policy makers will
decide in December on any early end to a levy on companies for
earthquake reconstruction, the government said. Without the
support measures, the economy would face “an extremely high
risk of stalling,” Abe said.

A bigger challenge awaits with reforms that would threaten
vested interests, such as reducing labor regulations dating from
the 1960s that offered lifetime employment for workers at larger
enterprises -- rules that reduce the attractiveness of hiring.
Abe, 59, has also identified agriculture, health care and
tourism as sectors to be targeted in his so-called third arrow.

First Arrows

The administration is also engaged in trade-liberalization
talks with the U.S.-led Trans Pacific Partnership group of
nations. Millions of small farmers have opposed the move,
seeking to maintain protection for meats, wheat, sugar, dairy
and other goods like rice, which has a tariff of 778 percent.

Abenomics has so far relied on the first two arrows -- of
government spending and BOJ Governor Haruhiko Kuroda’s
unprecedented commitment to achieve 2 percent inflation by
increasing the supply of money -- to end two decades of Japanese
malaise.

The first two components have done little to change
companies’ reluctance to unleash their improving earnings, which
left some 220 trillion yen in cash on their balance sheets at
the end of June, according to data compiled by the BOJ. Regular
wages excluding overtime and bonuses fell 0.4 percent in August
from a year earlier, a 15th straight drop, government data
showed yesterday.

Household Concerns

More than 40 percent of the working-age population is
neither employed nor looking for a position, with the absence of
women on the job holding down Japan’s potential growth. Abe has
highlighted the female job growth as a potential dynamo for the
nation. Tapping the resource would require greater access to
childcare for mothers.

Meantime, households are girding for a 3 percentage point
increase in the consumption levy, to 8 percent starting April 1.
Consumer confidence fell in August for a third consecutive
month, and sentiment among merchants declined for a fifth
straight month.

“It’s important to have them spend,” Takeshi Niinami,
chief executive officer of Japanese convenience store chain
Lawson Inc. and a member of the Industrial Competitiveness
Council that contributed to the growth strategy, told reporters
yesterday. “I want to raise wages to encourage employees to
work but we will be in a phase where bonuses will also go up so
I have to consider if there is any way to prevent employees from
saving.”

BOJ’s Role

For his part, Sony Corp. Chief Executive Officer Kazuo
Hirai told reporters yesterday that the higher sales tax --
designed to help rein in the world’s largest public debt burden
-- is good for the country. Sony is among Japanese exporters
benefiting from the yen’s slide.

Japan’s central bank has indicated that it will add to
already unprecedented easing if a setback to the economy
warrants it. For now, Governor Haruhiko Kuroda is targeting an
annual 60 trillion to 70 trillion yen expansion in the monetary
base, with all 36 economists in a Bloomberg News survey
expecting the BOJ to maintain this target at a meeting this
week.

Twenty-six of the 36 economists expect the BOJ to add to
easing in the first six months of next year, according to the
survey carried out between Sept. 26 and Oct. 1. Increasing
purchases of Japanese government bonds, exchange-traded funds
and Japanese real-estate investment trusts are among the
options.

’Political Grandstanding’

Abe, who has enjoyed the longest-lived popular backing of
any prime minister since Junichiro Koizumi was in office
2001-2006, is betting the stimulus plan will be enough to
assuage unease among segments of the public and his own Liberal
Democratic Party about proceeding with the higher consumption
duties. The legislation for the increase was passed by the
former government, before Abe took office in December.

“It’s just political grandstanding to show the Abe
administration is making the best efforts for a rise in wages --
it will be difficult to make up for the 3 percentage-point
increase in the sales tax by a wage rise,” said Masamichi
Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo.
“The reforms that will bring animal spirits back are the real
structural reforms.”

The sales tax is set to ratchet up again to 10 percent in
October 2015, subject to a go-ahead by the prime minister. Abe
said any further increase would depend on economic conditions.